Archive for the ‘Economics & Politics’ Category

If you were buying gasoline for your car in 2008, then you are aware of how high gas prices were. $4/gallon is no joke ($147/barrel), especially if you are unemployed (which there was a 10% chance of at the time). World oil prices peaked at this time and were the highest ever recorded. The financial crisis is partly responsible for the sharp decline in prices between 2008 and 2009 (decreased demand) and I will explain in more depth below. Oil prices have historically been indexed to global economic prosperity (especially the U.S.), which is why we notice a steady increase in prices (increased demand) as government bailout funds slowly start churning the economy year after year until today (08′-14′). However, there has been a shift in the relationship between controlled supply (OPEC) and the price of crude oil ever since the U.S. has become its number one supplier of crude.

 

Gas

Courtesy gasbuddy.com

 

The price of oil has fallen by more than 40% since June 2014, when it was $115 a barrel. It is now below $70. Respectively, this translates into about $3.75/gallon and $2.50/gallon. This comes after nearly five years of “stability”. On November 27th, the Organization for the Petroleum Exporting Countries (OPEC), failed to reach agreement on production curbs, sending the price tumbling. The surge in supply has been the main catalyst in the plummeting price of oil. Weak demand has also been a major factor.

The oil price is partly determined by actual supply and demand, and partly by expectation. Demand for energy is correlated to economic activity. It also spikes in the winter in the northern hemisphere, and during summers in countries which use air conditioning. Supply can be affected by weather (which prevents tankers loading) and by geopolitical upsets. If producers think the price is staying high, they invest, which after a lag boosts supply. Similarly, low prices lead to an investment drought. OPEC’s decisions shape expectations: if it curbs supply sharply, it can increase prices. If it increases supply, it can decrease prices. Saudi Arabia produces nearly 10m barrels a day—a third of the OPEC total.

 

Oil prices have historically been cyclical.

 

Demand is currently low because of sub par economic activity, increased efficiency, and a growing switch away from oil to other fuels. America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. America used to be extremely dependent on foreign oil coming mainly from the Saudis; there has been a fundamental shift in American oil consumption. The American energy revolution, led by the new technologies of hydraulic fracturing and horizontal drilling, has created a flood of new shale-oil and natural-gas production that has overwhelmed world markets and driven prices down dramatically. The Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground. They are part of the OPEC price-fixing gridlock as of late.

The steep ascent in the price of oil between 2004 and 2008 coincided with the first significant decrease in non-OPEC supply since 1973 and an unprecedented surge in global demand. China increased its demand for oil from 7M barrels/day to about 10M barrels/day during this time period. Other growing economies, such as Brazil & Indian increased their demand for oil.  Although OPEC members responded by increasing their production, they lacked sufficient capacity after years of restrained field investments to bridge the growing gap between global demand and non-OPEC supply.

On December 12, 2014 the Dow Jones industrials lost more than 315 points, a 1.8 percent decline, to cap a weekly loss of 3.8 percent — the deepest drop since November 2011. The main reason why the stock market is losing steam is because people realize that the decline in global oil prices is great for consumers, but bad for energy corporations. Lower crude oil prices will put pressure on indebted, U.S. shale oil producers that invested heavily into fracking and other technologies.

 

Supply and demand diagram showing both OPEC-controlled and unconstrained supply curves. Described in text.

Courtesy psu.edu

Overall, OPEC appears to be losing global influence, mainly because the United States is the main consumer of oil and is less dependant on OPEC than ever. As presented in the graph, OPEC controls the “low-cost” part of the supply curve. By exercising control and reducing output from where it would be in an uncontrolled, competitive market, they are able to shift the equilibrium from the competitive point (P*, Q*) to what I call the “OPEC” point: (P(O), Q(O)), which gives us a price that is higher than the competitive market price. Lately, with OPEC failing to curb supply, we’ve seen a drop in price from the “OPEC” point to the competitive point. Let’s hope that this paradigm shift continues along with a strong dollar in order to ensure economic prosperity.

 

 

 

Advertisements

FIFA, (The International Federation of Association Football) is an NGO and the international governing body for most of the soccer played on the planet. FIFA is responsible for organizing the setting, regulations and structure of most football matches on the globe, the most famous being the World Cup. FIFA is also one of the most corrupt and oldest NGO’s.

FIFA member association meeting.

FIFA member association meeting.

 

FIFA was created in 1904 when it served only seven member associations (France, Denmark, Belgium, Netherlands, Spain, Sweden and Switzerland). Prior to the inception of FIFA, the UK’s “Football Association” was the primary authority governing football affairs. FIFA is literally structured like a government: Congress (legislative body), Executive Committee (executive body) and General Secretariat (administrative body). As most governments, FIFA is very susceptible to corruption. The FIFA congress is composed of representatives from each of the member associations (209 countries). The FIFA President, currently Sepp Blatter, is appointed for four-year terms by the FIFA congress. The executive committee (composed of 24 members), is also elected by the FIFA congress.

Thou Shalt Not Tax…

FIFA is organized as a not-for-profit organization (NGO) under Swiss law and is headquartered in Zürich, Switzerland. As a result, FIFA pays absolutely no tax on revenue that it earns from events such as the world cup. In Brazil (World Cup 2014), for example, the countries lost revenue from exempting FIFA from tax laws will translate into about $250 million dollars. Brazil stands to gain about $575 million from taxing prize money distributed to all participating member teams, in additional to all the touristic revenue that it will gain from this World Cup. Still, I’m sure that Brazilian citizens would rather have $250 million dollars coming into the country as tax revenue from FIFA than from their own pockets.

Brazil welcoming FIFA for the 2014 World Cup.

Brazil welcoming FIFA for the 2014 World Cup.

FIFA is ugly and people need to know it. FIFA today is a multinational that is eating up the ball. Countries can’t do anything against them.” Former Argentina player, Diego Maradona, The Sunday Times

 

World Cup host country auction

The host cities for the World Cup are determined by a bidding process, this process is highly secretive and  fair (according to FIFA). In 2009, FIFA received 11 bids from countries aspiring to host one of the biggest events known to man. For 2018, the bidding countries included: England, Russia, Portugal and Spain. For 2022, the bidding countries included: Japan, Australia, Qatar, South-Korea and the United States. The bidding process is incredibly profitable for FIFA, as they are able to collect millions of dollars on bid money and ultimately choose only one host nation. Australia, for example, paid close to $50 million dollars just to submit a bid. The 24 executive committee members vote on which nation will host the World Cup (only 22 members eligible to vote in 2010 because 2 members were suspended for accepting bribes). A FIFA executive committee member and Qatari national, Bin Hammam, was banned by FIFA for bribery. Apparently Mr. Hammam had lavished millions of dollars worth of gifts, cash and trips towards FIFA’s executive committee in hopes of securing Qatar’s 2022 World Cup bid. Most people who are familiar with FIFA antics are not surprised by the fact that Qatar will be the setting for the 2022 World Cup.

adf

These [corruption] allegations are baseless and riddled with innuendo designed to tarnish the reputation of Qatar’s 2022 Bid Committee.” Qatar 2022 Bid Committee statement, eurosport.com

 

Match Fixing

Ibrahim Chaibou, a Nigerien referee during the 2010 World Cup is currently retired and wealthy. He deposited $100K cash into his bank account in South African hours before refereeing a match between Guatemala and South Africa. The false penalties (multiple) called were blatant even to the untrained eye. Football 4U, is the name of a match fixing syndicate that sources and appoints referees for soccer matches all around the globe. They make money by providing legitimate referees, bribing them and controlling the outcome of games for gambling purposes. The leaders of Football 4U stand to gain millions of dollars by manipulating the outcome of games.The South African federation, troubled by financial difficulties and administrative dysfunction, was a ripe target. Once Football 4U had insinuated itself, the syndicate was able to switch referees at the last moment, and it had access to dressing areas and the sidelines. Match fixing has been plaguing FIFA for decades, yet they’ve never taken a serious stance against it. I’m sure that there have been a few of FIFA’s own to indulge in some fixed gambling.

 

01fixing-1-superJumbo

Ibrahim Chaibou

 

Build me a Football kingdom worthy of FIFA

The host nation for the World Cup is driven by FIFA to build new stadiums and infrastructure that is “FIFA-Quality”. The demands to develop these soccer worlds at break-neck speeds usually means construction deaths and wasted money. Additionally, natives also end up losing their homes (about 250K displaced in Brazil 2014). I’m assuming that when the smoke clears from the World Cup in Brazil, the empty stadiums will be used as homeless shelters. Protestors are powerless against FIFA, as they are powerless against their own governments who seek to exploit them instead of protect them. Organizations like the World Bank that have noble mission statements will also see the World Cup as a way of preying on developing nations. The World Bank will provide loans (funding mainly by US banks) in order to fund for major infrastructure projects (roads, electricity) that they know the borrowing nations will never be able to pay back.

nino-futbol-espiritu santo

 

Doing some good!

FIFA’s Football for Hope program provides funding for NGOs and community-based organizations that use football as an instrument for social development. FIFA aimed to build 20 centers across Africa, run by local best-practice partner organizations, to promote football and educational programs on topics including HIV/AIDS awareness, literacy, and gender equality. However, FIFA donates only 0.7% of its revenue towards charitable programs. Macy’s donated about 8% of its profits in 2010. In 2012, Target contributed 4.7 percent of its profit and combined that sum with a promise to donate $1 billion to public education. FIFA should be held to a higher standard considering the amount of wealth, power and international influence that it exudes. That’s cute though, 0.7%…. that’s enough money for “Football for Hope” to by three things: a soccer ball, a hammock and one condom that can be shared by an entire village. The FIFA organization is similar to any organization that has power; it wants more. It’s incredible how FIFA exerts gargantuan influence over most of the world by simply showcasing a group of men running around in circles kicking a ball.

Finally, the world is seeing FIFA for what it is: a stateless conglomerate that takes bribes while acting as a battering ram for world leaders who want to use the majesty of the World Cup to push through their development agendas at great human cost.” Dave Zirin, New York Times

 

What is a Bitcoin?

Bitcoin is a worldwide digital currency that was created in 2009 by an entity using the alias – Satoshi Nakamoto. It is a peer to peer, decentralized, non-regulated currency. Bitcoin is not controlled by banks, governments or other authoritative entity. The supply of Bitcoins is regulated by a process called mining, which makes this digital currency resistant to dramatic inflation (supposedly). Bitcoins can be stored digital wallets, or in cloud servers. In short, Bitcoins are mediums of exchanges much like any other “real” currencies. The US Government maintains the circulation of Dollars, but there is no central agency that controls Bitcoin. Owners of Bitcoins are able to maintain anonymity, which is very appealing to a certain percentage of each population. Owners of Bitcoins are able to avoid taxes when paying for transactions over the internet. Bitcoin is the first mainstream peer to peer cyber currency, much like Napster was the first mainstream peer to peer file sharing software.

Physical Bitcoin - Storage device for encrypted digital key

Physical Bitcoin – Storage device for encrypted digital key

How are Bitcoins created?

Much like gold is excavated from a mine, Bitcoins are excavated by digging through data. It takes computers with brute processing abilities to mine for Bitcoins. Individuals such as you and I, are incentivized (mining rewards) to contribute our computing resources and joining as “nodes” on the Bitcoin network. Every single time any transaction happens in the Bitcoin network, it needs to flow through every user’s software. It is almost like blood cells flowing through your veins. This increases the integrity of each transaction and hopes to battle fraud and hacking attempts. Mining is more akin to rolling dice than solving problems. To understand mining, one needs to understand what a hash function is. Put simple, a hash function takes an input and creates an output based on a criterion. The output is consistent every time you perform the function on a given input. It is very difficult to determine an input, given only the output. For example, the square root of 3 is: 1.73205080756887729352744634150. Now take the digits from the 6th place from the decimal all the way to the 10th place: 08075. The square root of 3 is the input (1.73205080756887729352744634150) and output is 08075 (6th place from the decimal all the way to the 10th place). Pretty simple right? Input – Output. Now imagine, given the output of 08075, that I have asked you to provide me with the correct (unknown) input. You would need to try out billions upon billions of inputs; this is what is referred to as mining. An excruciatingly difficult task, which must be solved with the processing power of computers. The process of mining is regulated by Bitcoin software. Every single time a user “cracks the code”, they are awarded with 25 Bitcoins. This is how the supply of Bitcoins is regulated in cyberspace. The algorithm built into the mining software adjusts itself accordingly in order to stay on pace for 21 million Bitcoins by 2140. 

Who’s mining?

Whenever there is serious money to be made, there will be serious competition. Mining requires massive electrical and computational resources, so naturally, the affluent and tech savvy will be the first to “strike gold”. However, your average Joe is able to engage in a strategy called pooling. Pooling simply means linking up with a bunch of “friends” via network in order to create a massive processing force (imagine 100,000 computers in a warehouse). The aforementioned “shared” processing force is able to compete with the few supercomputers that the affluent have working towards mining. Whenever a pooled community strikes gold, the dividend is shared among the pool members. The process of mining is cumbersome and can be as random as winning a mini-lottery. It’s all about which computer gets lucky and deciphers a code first. Darwin’s theory is applicable in cyberspace as well as real space.

Supercomputers used for mining Bitcoins.

Supercomputers used for mining Bitcoins.

What are Bitcoins worth?

The price of Bitcoins started at around $0.05 per Bitcoin in 2008 to as high as $1,116 in late 2013. The price of a Bitcoin is currently about $690. Bitcoin pricing has been pretty volatile lately. The cyber-currency is not insured by agencies such as the FDIC and has proved to be quite volatile as of late. Similar to financial instruments, there are institutions that allow consumers to buy Bitcoins at fair market values (for a fee). Unlike financial instruments (stocks, bonds), Bitcoins intrinsic value is derived purely from speculation. Traditional financial instruments are valued by their collateral (a company or country).   The real question is: Are you willing to invest your resources into an unregulated, decentralized, uninsured, volatile, cyber currency?

Bitcoin values from Jan. 1 2013 through Mar. 3 2014, via Coinbase.

Bitcoin values from Jan. 1 2013 through Mar. 3 2014, via Coinbase.

   

The present and future of Bitcoins
 

Mt Gox, an online exchange for people to buy and sell their virtual money, filed for bankruptcy in a Tokyo district court last week. Mt Gox was a poorly run venture that has been hacked for Bitcoins since 2011. The most recent hack caused the company to lose about $500 million worth of Bitcoins. After Mt Gox crashed on Feb 24, the value of Bitcoin fell to $440 after reaching highs above $1,000 in November. A wild 50% decrease in about 3 months.

Flexcoin, a provider of “cold storage” for client Bitcoins, announced last Tuesday that it has closed on the aftermath of being hacked of some $600,000 worth of the cyber currency. On Wednesday, Flexcoin announced, “Flexcoin does not have the resources, assets, or otherwise to come back from this loss, we are closing our doors immediately.” This sucks for anyone who was using Flexcoin as a virtual bank instead of stuffing their Bitcoins (hard drive) under their mattress. Remember, Bitcoins are not insured.

Supporters of Bitcoin say that the anonymous, decentralized Bitcoin is a way to evade large banks, payment processors and governments that make billions of dollars each year as financial intermediaries among consumers. The Winklevoss Twins (guys that fought Mark Zuckerberg over Facebook), are heavily vested in Bitcoins and are attempting to create an ETF (exchange traded fund) for Bitcoins. An ETF would be taxed and riddled with many fees. This is an excellent way to get rich from fees that are derived from people trading a digital currency that has no intrinsic value. 

I believe that the price of Bitcoins are heavily inflated and lack any collateral whatsoever. I also believe that the Bitcoin is a scheme that has been orchestrated by a group of individuals who are attempting a “get rich quick scheme” and succeeding. Bitcoins have a market capitalization of $8.5 billion dollars so far. Consumers who are leveraging themselves heavily on Bitcoins are rolling the dice.  When the housing bubble burst in 2008, there were a handful of individuals that were rolling on the floor laughing with very large sums of money. The rest of us suffered the consequences of a crippled economic system, foreclosures, unemployment, ect. The individuals that created the Bitcoin are waiting for their turn to roll on the floor laughing. Stay tuned.

Hugo Chavez took the Venezuelan Presidential office in 1999. During his tenure as President, he was able to use Venezuela’s abundance of natural resources (oil) as a means of securing the financial stability of his people. Chavez’s socialist policies, aimed at redistributing wealth, have never been perfect and have always been blatantly corrupt. Nevertheless, during his tenure as President, Chavez was able to reduce poverty and inequality substantially while also cutting the unemployment rate by half (according to The World Bank).

Chavez’s heroics are short lived. The socialist engine of production in Venezuela merely enables its citizens to receive slices (small slices) of the economic pie. The problem is that it doesn’t empower the citizens to cook the pie.

Enter Nicholas Maduro. The bus driver, who managed to rise to the ranks of a political leader. Maduro was eventually handpicked by Chavez to succeed him as President. Maduro won a 2013 Presidential election against Henrique Capriles by a 1.49% margin. Capriles demanded an audit of all the votes in the closest election since 1968, which of course was impossible according to the “election council”. Capriles (Governor of Miranda) defines himself as, ” A center-left ‘progressive’ follower of the business-friendly but socially-conscious Brazilian economic model”. Were the 2013 elections in Venezuela rigged? It’s hard to say when the Venezuelan extreme leftist socially run media was portraying Capriles as a neo-liberal Zionist.

Venezuela experienced 56% inflation in 2013, the highest in the world. Maduro has continued enforcing Chavez’s futile monetary policies that were enacted in 2003. The official exchange rate in Venezuela is overvaluing the Bolivar (Venezuelan currency) vs. the dollar. The high demand for the dollar, coupled with the shortage of the dollar, has created a black market that is further devaluing the Bolivar. The dollar is valued at 10 times the Bolivar’s official exchange rate in the black market- this is a prime factor in the extreme inflation Venezuela is currently experiencing.

People are rioting in Venezuela because every day their salaries (if they even exist) are worth less, they can’t buy basic items (toilet paper, milk, sugar), an astronomical murder rate (1 person murdered every minute in 2013), the list continues. Production of food in the country is decreasing and foreign investors are reluctant to invest in a country with such high political and economic volatility.

One of my former professors at Suffolk University is Venezuelan. I remember him explaining the economic situation in Venezuela and how difficult (almost impossible) it is to expatriate money from the country. The Maduro regime is continuing Chavez’s currency controls which may eventually cause hyperinflation (inflation of over 50% month to month). Maduro actually forced an electronics store to sell all of its products at rock bottom prices in order to swing positive opinion his way before elections. He also banned a Columbian TV station because they are encouraging the protests. It’s amazing how a country with the largest oil reserves experienced 56% annual inflation in 2013! ExxonMobil left in 2007 because this socialist government doesn’t understand that they can’t call the shots when they do not own the technology and/or means of production, which are in dire need in order to extract and refine oil from the complicated terrain.

Venezuela should be a global Latin American powerhouse much like Brazil at this point. One can only wonder what state Venezuela would be in today if Henrique Capriles had won the 2013 election. Venezuelan leadership will eventually need to move from the far left to at least the middle in order to allow businesses to invest and create jobs and sustainable lives for its citizens. If the Venezuelan socialist leadership is not competent enough to create jobs with an ocean of oil in its back yard, then at least provide a comfortable atmosphere for foreign expertise to come to the “rescue”.

Image